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Chapter 4: Q9-40BP (page 285)

Mark Ventura has just purchased an annuity to begin payment two years from today. The annuity is for $8,000 per year and is designed to last 10 years. If the interest rate for this problem calculation is 13 percent, what is the most he should have paid for the annuity?

Short Answer

Expert verified

The most suitable purchase amount is $33,996.36.

Step by step solution

01

Definition of Annuity

A financial product or financial investment that provides the investor with a stream of fixed payments is known as an annuity. The investor starts receiving payment as the annuitization period gets over.

02

Computation of present value of the annuity

Presentvalueofannuity=Amount脳[1-11+rnr]=$8,000脳[1-11+0.13100.13]=$8,000脳5.4262=$43,410

The most suitable amount to be paid for an annuity = $43,410

03

Discounting off two years

V=Futurevalue脳1(1+i)n=43,410脳1(1.13)2=$33,996.36

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